Even if the war between the United States and Iran is resolved in the near term, analysts warn that it will take months for energy flows to return to normal.
And with the global economic impact having a long, unpredictable tail, the South African Reserve Bank has warned that it’s difficult to see any interest rate relief coming anytime soon.
Head of Client Group for Schroders South Africa, Philip Robotham, noted on Monday (20 April) that the shocks to global oil markets since the war erupted at the end of February will take a long time to filter out.
He said that the next couple of months will show very large global oil inventory draws, and in some regions, inventories will still reach critical levels.
Even if peace talks between the United States and Iran play out in a best-case scenario, the region will take a long time to return to pre-war energy flows.
“Tankers will start moving, but oil fields and oil refineries are still shut,” he said.
According to Robotham, approximately 2.2 million barrels per day (mb/day)—about 2% of global refinery output—are currently damaged and offline.
Additionally, around 3 to 4 mb/day of production capacity is shut in, he added.
“Both Kuwait and Iraq have stated that it will take three to four months to resume production—once the region is stable,” he said.
“The global gas market has an even greater structural problem with around 17% of Qatar’s Liquid Natural Gas output damaged, which will take three to four years to bring back online,” Robotham said.
The ‘normal’ demand estimates of around 108 mb/day in 2027 meant that the oil market was in deficit. The restocking and production outages mean that the market will now be in a bigger deficit, he said.
The impact on oil prices—and thus global petroleum—will be palpable.
Even with a positive outcome from peace talks and low supply disruptions, oil prices are not expected to drop below $75 a barrel or return to the sub-$60 levels seen before the war.
In a worse case, where supply disruptions remain high, the baseline is $100 a barrel or higher. Other analysts have pointed to oil prices moving between $105 and $115 a barrel if things continue as they are.
“Regardless of a revival of peace talks, we do not see the oil price collapsing below $75/bl over the foreseeable future,” Robotham said.
“This is also reflected in the fact that the two- and three-year forward oil prices barely moved after the initial announcement of the ceasefire.”
He said the group expects oil prices to keep rising over the next 12 to 24 months.
Knock-on effect on fuel prices and interest rates in South Africa
As an importer of energy, South Africa stands to suffer significantly.
The higher global energy costs not only have a direct impact on South Africans through higher petrol and diesel prices, but feed into production, logistics and retail costs.
This, in turn, drives up inflation—something which the SARB is keen to get ahead of.
On the fuel side, South Africans faced petrol and diesel price hikes of around R3 and R7 per litre, respectively, in April. These would have been R3 higher had it not been for government intervention.
For May, current fuel price recoveries point to another R2.50 and R7.50 per litre hike building—with a possibility that the R3 relief will be added back.
SARB governor Lesetja Kganyago told Reuters that it was difficult to see a near-term path for easing interest rates due to the volatility from the war in the Middle East and its impact on inflation.
He also said the bank would not update its inflation or growth forecasts between meetings and was relying on “scenarios” to understand the impact of wildly gyrating commodity prices, including fuel and fertilisers.
“All that we know is that it is growth-negative and would also lead to a rise in inflation,” Kganyago said of the conflict’s impacts in an interview on the sidelines of the International Monetary Fund and World Bank Group spring meetings in Washington.
“In an environment where you are expecting inflation to rise, I don’t think that anybody can still be talking about a relaxation in monetary policy in an environment like that,” he added.
The bank kept its policy rate at 6.75% last month, citing the need for caution due to the eventual impact of higher energy prices on inflation.
Before that meeting, the bank redrafted its risk scenarios to gauge the impact of the Middle East conflict.
The adverse scenario assumed oil averaging $94 a barrel throughout the year and a 20% depreciation of the exchange rate.
“That was in March. We are now in a completely different environment,” he said. “We will do new scenarios in May.”
The Middle East war and the wild swings in commodity prices it has caused largely short-circuited a monetary easing push among emerging market central banks.
Still, he said South Africa faced no fuel shortages and would not have a sense of the fertiliser shortage impact on its farmers until the autumn planting season.
“Prices have moved in all directions…the one thing that we are certain of is that uncertainty is with us.”
With Reuters
